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Commissioner Of Income-Tax Central v. Dudwala And Co.
Court of Calcutta — Reference on Registration under Section 26A of the Income-tax Act
Factual and Procedural Background
This reference arose at the instance of the Commissioner of Income-tax after the Appellate Tribunal allowed an appeal by the assesses and ordered that the firm of Dudwala & Co. should be registered under Section 26A of the Income-tax Act. The question referred to the Court was whether, on the facts and circumstances of the case, the Tribunal was right in so holding.
The factual matrix (as stated in the opinion) is:
- The partnership originally included Rai Bahadur Rameshwar Nathany (acting as representative of a Mitakshara Hindu undivided family under the style Baldeodas Rameswar), Mannalal Musuddi and Rimkumar Agarwal. Mannalal Musuddi left the partnership in November 1942.
- A fresh partnership deed dated 10 February 1946 recorded two partners: Rameshwar Nathany (twelve annas share) and Ramkumar Agarwala (three annas); one anna was devoted to charity.
- A suit for partition by a member of the Hindu undivided family was instituted (original side No. 1436 of 1943) and resulted in a compromise; the settlement (consent decree) contains clauses stating that the joint family ended on 21 September 1943 and that the firm of Dudwala & Co. would continue with specified shares (notably clauses 7 and 10 quoted in the opinion).
- An application for registration under Section 26A of the Income-tax Act was made; the Income-tax Officer refused registration on the ground that, because the joint family had come to an end, the family could not form a partnership with a stranger unless the separate members along with the stranger formed a partnership and applied for registration. The Assistant Commissioner upheld that refusal on appeal.
- The Tribunal allowed the assesses' appeal and held the application maintainable under Section 26A; the revenue sought a reference to this Court on whether the Tribunal's conclusion was correct.
Legal Issues Presented
- Whether, on the facts and in the circumstances of this case, the Tribunal was correct in holding that the partnership firm of Dudwala & Co. should be registered under Section 26A of the Income-tax Act.
Arguments of the Parties
Revenue's Arguments (as presented in the opinion)
- The Income-tax Officer refused the Section 26A application on the basis that the joint family had come to an end; therefore the family (as a collective or by its previous status) could not form a partnership with a stranger unless the separate members together with the stranger expressly formed a partnership and applied for registration.
- Dr. S.K. Gupta for the revenue relied on the relevant rules under the Act (r.2, r.3 and r.4) to emphasise formal requirements: the instrument must specify individual shares; the application must be signed by all partners (as constituted at the date of application); and the Income-tax Officer should register only if satisfied a firm exists as shown in the instrument.
- Dr. Gupta also argued that the consent decree (clause 10) showed the twelve annas share would be held by parties according to shares defined in clause 3 (i.e., the decree tied the partnership interest to individually defined coparcenary shares), and he contended that the Mitakshara joint family ceased to exist on institution of the suit or upon the consent decree.
- The revenue's practical position (as reflected in the refusal) was that the authorities were declining registration, which had tax consequences because an unregistered firm could attract different tax treatment.
The opinion does not contain a detailed account of the assessees' separate legal submissions beyond the Tribunal's conclusions and the Court's exposition that the firm's instrument satisfied the requirements of Section 26A and the applicable rules.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Parmeshwar Dube v. Gobind Dube, 43 Cal. 459 : (A.I.R. (3) 1916 Cal. 500) | Establishes that, in a Mitakshara undivided Hindu family, a co-parcener cannot predicate of the joint property that he has a definite share prior to partition and that a co-parcener seeking partition is not entitled to require the Karta to account for past dealings in family property beyond an account of the property as it exists at the time of demand. | The Court used this authority to explain that although partition alters the nature of the Karta's liability (he will account on a different footing after partition), it does not dissolve or alter the fact that the Karta (Rai Bahadur Rameshwar Nathany) remained a partner for purposes of the firm; thus partition did not affect the existence of the partnership or its registerability under Section 26A. |
Court's Reasoning and Analysis
The Court proceeded by analysing the statutory text and the facts stated in the instrument and consent decree. The reasoning (as given in the opinion) can be summarised in the following steps:
- Statutory requirements: The Court observed that Section 26A requires (i) a firm constituted under an instrument of partnership which specifies the individual shares of the partners, and (ii) an application made in the prescribed form and complying with the relevant rules. The rules (r.2–r.4 and the schedule note) require, inter alia, that the application be signed by all partners as constituted at the date of application and that the Income-tax Officer be satisfied on existence of the firm as shown in the instrument before issuing a certificate of registration.
- Nature of the instrument: The deed and the consent decree were examined. Clause 7 preserved the continuity of the Dudwala & Co. partnership; clause 10 stated the parties had twelve annas share and that the firm "shall remain joint" and referred to shares defined in clause 3. The Court treated the instrument as a partnership instrument which specified individual shares.
- Effect of partition on partnership status: The Court rejected the submission that the dissolution of the Mitakshara joint family (by suit and consent decree) affected the constitution of Dudwala & Co. as a firm. The Court emphasised the legal distinction between coparcenary (status) and partnership (contract). Where the Karta alone (a member of a joint family) enters into partnership with a stranger, the Karta alone is the contracting partner; other coparceners have no contractual relations with the stranger.
- Interpretation of clause 10 and consequences of partition: The Court held that clause 10's statement that the parties would be entitled according to clause 3 did not alter the real character of the partnership interest. After partition, the members' proprietary relation to the twelve annas share becomes one of tenancy in common, but that alteration in proprietary tenure does not affect the Rai Bahadur's status as a partner of Dudwala & Co.
- Accounting liability versus partnership existence: Relying on the cited precedent, the Court explained that partition may change the basis on which the Karta must account to his coparceners, but it does not dissolve the contractual partnership relationship between the Karta and the co-partner. Thus, the firm continued to exist and met Section 26A's criteria for registration.
- Conclusion from statutory fit: Because the instrument constituted a firm and specified individual shares and because the application complied with the statutory form and rules (as to which the ruling accepted the Tribunal's view), the Court concluded Section 26A applied and the Tribunal's order allowing registration was correct.
Holding and Implications
Holding: The Court answered the reference in the affirmative: the Tribunal was right in holding that the partnership firm of Dudwala & Co. should be registered under Section 26A of the Income-tax Act. The assessees were entitled to their costs of the reference; the Certificate was "Certified for two counsel" as recorded in the opinion.
Implications:
- Direct effect on the parties: The Court's decision confirms that the partnership continued notwithstanding the partition of the Mitakshara joint family and that the firm satisfied the statutory requirements for registration under Section 26A. The revenue's refusal to register was set aside as incorrect, and the assesses were awarded costs of the reference.
- Scope and precedent: The opinion grounds its conclusion on established legal distinctions between coparcenary status and contractual partnership and on the cited Calcutta High Court authority regarding Karta's accounting obligations. The Court did not state that it was laying down a novel rule beyond applying these established principles to the facts; the decision therefore resolved the reference on the basis of existing law as explained in the opinion.
Reference answered. (Harries, C.J. agreed with the judgment of Chatterjee, J.)
Chatterjee, J.:— At the instance of the Commissioned of Income-tax, the question of law which has been referred to this Court for its opinion by the Tribunal is in these terms:
“Whether on the facts and in the circumstances of this case the Tribunal was right in holding that the partnership firm of Dudwala & Co. should be registered under Section 26A of the Income-tax Act.”
2. The facts shortly are as follows. The partners of the firm ware Rai Bahadur Rameshwar Nathany, representing the Mitakshara joint family under the name and style of Baldeodas Rameswar, one Mannalal Musuddi and one Rimkumar Agarwal. Mannalal Musuddi went out of the partnership in November 1942 and a fresh deed was executed by which the two partners carried on the business of the firm, in which the share of Rameswar Nathany (representing Baldeodas Rameswar) was twelve annas and Ramkumar Agarwala three annas. The remaining one anna share was devoted to charity. The deed was dated 10th February 1946. A suit for partition was instituted by one of the members of the Hindu undivided family. That suit was instituted on the original side of this Court and was marked No. 1436 of 1943. That litigation resulted in a compromise and a consent decree was passed the relevant clauses are set out in para. 4 of the referring order.
3. By cl. 1 of the terms of Settlement, the joint family came to an end on 21st September 1943. In cl. 3 the shares of each of the members of the family after the partition are stated. Clauses 7 and 10 are important and they are set out below.
Clause 7. “The business carried on under the names and Styles of Rai Bahadur Baldeodas Bameswar and Rameswar Nathany & Co. shall be stopped from the date hereof but this is not to affect the partnership carried on under the name and Style of Messrs Dudwala & Co. in which Messrs Baldeodas Rameswar are the partners and the said partnership shall be continued as provided in Cl. 10 hereof.”
Clause 10. “In the firm of Dudwalla & Co. the parties hereto have twelve annas shares and it shall remain joint and the parties shall be entitled thereto according to the shares mentioned in Cl. 3 thereof.”
4. An application was made in this case under Section 26A of the Income-tax Act. That section is in the following terms.
(1) Application may be made to the Income-tax officer on behalf of any firm, constituted under an instrument of partnership, specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being in force relating to Income-tax or super-tax.
(2) The application shall be made by such person or persona, and at such times and shall contain such particulars and shall be in such form and be verified in such manner, as may be prescribed; and it shall be dealt with by the Income-tax officer in such manner as may be prescribed.”
5. Dr. S.K Gupta, learned counsel for the revenue authorities, drew our attention to the rules bearing on the subject under r. 2,
“Any firm constituted under an Instrument of partnership specifying the individual shares of the partners may under the Provisions of Section 26A of the Income-tax Act register with the Income-tax officer the particulars contained in the said Instrument on application made in this behalf.”
6. Such application shall be signed by all the partners.
7. In the schedule to the form set out in R. 3 there is a note which says that the application must be signed by all the partners (not being minors) in the firm as constituted at the date on which the application is made and it must specify the names of the partner, the address, the date of admittance to partnership, interest on capital or loans, salary or commission from the firm and share in the balance of profit or loss.
8. Dr. Gupta also drew our attention to R. 4 which states that if on receipt of application referred in R. 3 the Income-tax officer is satisfied that there is a firm in existence constituted as shown in the Instrument of Partnership, and that the application has been properly made we shall grant a certificate stating that the instrument of partnership has been registered with him under Section 26A of the Income-tax Act.
9. The application under S. 26A was refused by the Income-tax Officer on the ground that (as?) the joint family had come to an end it could not form a partnership with a stranger as such until and unless the separate members of the family along with the stranger Ram Kumar formed themselves into a partnership and asked for registration.
10. On appeal the Assistant Commissioner took the same view. But the Tribunal held, and in our opinion rightly that the application ought not to have been refused and that the application was maintainable under S. 264.
11. Inasmuch as the Tribunal allowed the appeal of the assesses and ordered that the firm of Dudwala and Company should be registered the revenue authorities wanted the above question to be referred to this Court.
12. In our opinion, the Appellate Tribunal was justified in taking the view that S. 26A did apply to this case. All that the section requires is that there should be a firm constituted under an instrument of partnership and that the deed of partnership must specify the individual shares of the partners and that an application should be made in the prescribed form and should comply with the Rules.
13. Dr. Gupta's point is that in the application form it was stated that Nathany was the Karta or manager of a Hindu undivided family. If so it was a mere surplusage. The fact that there was a dissolution of the joint family which was governed by the Mitakshara School of law had no effect at all on the constitution of the firm. It was rightly conceded by Dr. Gupta that the members of the Joint family were not partners of the firm of Dudwala and company. Where a, the karta or managing member of a Hindu joint family enters into a partnership with B, a stranger, then A alone can be taken to be a partner and B is entitled and bound to treat only with a as a co-partner. In a suit for dissolution only A and B would be parties. To enable the members of A's family to intervene in the affairs of the firm would introduce confusion into partnership law and would paralyse trade and business. Coparcenary is the result of status but partnership is constituted by contract and the members of a's family have no contractual relations with B. The Karta, Rai Bahadur Rimes war Nathany, was thus one of the partners and the fact that there was a disruption of the coparcenary to which he belonged did not affect his status as a partner of the firm.
14. It was urged by Dr. Gupta that a Hindu undivided family governed by the Mitakshara school of Hindu law ceased to exist as such on the institution of the suit and in any event on the consent decree being passed therein. According to the true notion of an undivided Mitakshara family, it is settled law that no individual member can predicate of the joint property, that he as a member of a joint family, has a certain definite share. Partition, therefore, consists in ascertaining and defining the shares of the coparceners in the joint properties and the actual division of the properties by metes and bounds is not necessary.
15. Dr. Gupta argues that under cl. 10 of the decree, it was stated that in the firm of Dudwala and Company the parties had twelve annas share and it was stated that it shall remain joint. But he points out that the consent decree further provided in that clause that the parties shall be entitled thereto according to the shares mentioned in cl. 3 thereof which defines the shares of each of the members of the family in the joint family assets or properties.
16. In our opinion, even if cl. 10 did not state that the parties would be entitled to the 12 annas in the partnership according to the shares mentioned in cl. 3 of the terms of settlement, the effect would be the same. After the shares have been defined the members of the Mitakshara joint family may divide the property by metes and bounds or they may continue to live together and enjoy the property in common. Yet, that would effect the mode of enjoyment but not the tenure of the property. Therefore, the mere mention that the parties would be entitled to twelve annas share of the firm of Dudwala and Company according to the shares specified in the terms of settlement did not make any alteration as, to the real character of the property. The family ceased to be joint and the shares were defined, and the necessary consequence is that any property, e.g, the twelve annas share in that firm would be held by the members of the family as tenants in common.
17. But that has no effect whatsoever or the rights of the Rai Bahadur as a member of the firm. It cannot be contended that the firm was dissolved because the consent decree had been passed in the suit brought by one of the Nathanys in this Court. The revenue authorities are really refusing to register the firm so as to exact higher tax on the basis that they were an unregistered firm. It is not really their case that Dudwalla & Co., ceased to be a firm. Only the nature of the liability of the Rai Bahadur vis-a-vis his coparceners was changed as a result of that decree in the partition suit. Before the disruption he as Karta was liable to account in a very limited sense. A co-parcener seeking partition is not entitled to require the Karta to account for his past dealings in the family property. All that he is entitled to is an account of the family property as it exists at the time he demands a partition. That law was settled in this High Court in the case of Parmeshwar Dube v. Gobind Dube, 43 Cal. 459 : (A.I.R (3) 1916 Cal. 500). After the partition decree was passed, the Rai Bahadur would be liable to render account in respect of the twelve annas share on a different basis. But still he would continue to be a member of that firm and the partnership would not be in any way affected by the passing of that decree in the partition suit.
18. In my opinion the Tribunal was right when it took the view that the partnership continued and S. 26A was applicable.
19. Vis-a-vis the members of the family of the Rai Bahadur might be liable to account, as I said before, on a different footing. But he did not cease to be a partner of the firm and as such the application was rightly made under S. 26-A on behalf of the firm which was constituted under a proper instrument of partition which specified the individual shares of the partners. The answer to the question put to us must therefore be in the affirmative. The assessees are entitled to their costs of this Reference. Certified for two counsel.
Harries, C.J:— I agree.
V.R.B
20. Reference answered.
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